BILL ANALYSIS �
SB 293
Page 1
Date of Hearing: June 21, 2011
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
SB 293 (Padilla) - As Amended: June 13, 2011
SENATE VOTE : 36-0
SUBJECT : Payment bonds: laborers.
SUMMARY : Reduces the time a claimant must give notification
that he or she is enforcing a claim against a bond for a public
works project, decreases the time period during which a
contractor must pay his or her subcontractors, exempts laborers
from preliminary notification requirements and any deadline to
enforce a bond claim for private works of improvement, and
prohibits a public entity from retaining more than 5% of a
contract price until final completion and acceptance of a
project. Specifically, this bill :
1)Decreases, from 10 to 7, the number of days by which a prime
contractor or subcontractor must pay a subcontractor after
receiving a progress payment, unless otherwise agreed to in
writing.
2)Requires a claimant to give written notice to the surety and
bond principal that he or she is enforcing a claim prior to
completion or recordation of the Notice of Completion (NOC) of
a project, commencing January 1, 2012.
3)Exempts a laborer, as defined, from preliminary notice
requirements to a surety and bond principal and any deadline
to enforce a claim after the completion of a project for
private works of improvement, commencing July 1, 2012.
4)Prohibits a public entity from retaining more than 5% of a
contract price until final completion and acceptance of a
project.
5)Requires that retention proceeds between an original
contractor and a subcontractor, or between two subcontractors,
not exceed 5% of payment or contract price. Does not apply if
the contractor provides written notice to the subcontractor,
prior to or at the time that the bid is requested, that a bond
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may be required and the subcontractor subsequently is unable
or refuses to furnish to the contractor a performance or
payment bond issued by an admitted surety insurer.
6)Prohibits progress payments on public works contracts from
being made in excess of 100% of the percentage of actual work
completed.
7)Authorizes a public entity to retain more than 5% of the
contract price in public works projects under the following
conditions:
a) For projects awarded by state departments, as defined,
the project is substantially complex and the department
includes this finding and the actual retention amount in
the bid documents;
b) For projects awarded by local entities, as specified,
the governing body of the local public entity has approved
a majority vote during a properly noticed and normally
scheduled public hearing prior to bid that the project is
substantially complex, and includes this finding and the
actual retention amount in the bid documents; and,
c) Retention proceeds between an original contractor and a
subcontractor, or between two subcontractors, shall not
exceed the specified retention percentage in the contract
between the public entity and the original contractor.
8)Sunsets these retention provisions on January 1, 2016.
9)Defines "public entity" to mean the state, including every
state agency, office, department, division, bureau, board, or
commission, the California State University, the University of
California, a city, county, city and county, including
chartered cities and chartered counties, district, special
district, public authority, political subdivision, public
corporation, or nonprofit transit corporation wholly owned by
a public agency and formed to carry out the purposes of the
public agency.
EXISTING LAW :
1)Requires that, for private and public works of improvement and
in a public works contract, a prime contractor or
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subcontractor pay to any subcontractor, no later than 10 days
after receipt of each progress payment, unless otherwise
agreed to in writing, the respective amount allowed the
contractor on account of the work performed by the
subcontractors, to the extent of each contractor's interest
therein, as prescribed.
2)Deems that willful and deliberate failure by a contractor to
pay money owed for materials and services rendered, when the
contractor has sufficient funds, constitutes cause for
disciplinary action by the Contractors' State License Board
(CSLB).
3)Requires, with regard to a contract entered into on or after
January 1, 1995, that in order to enforce a claim upon any
payment bond given in connection with a public work, a
claimant give the 20-day public works bond preliminary notice,
as provided. Further authorizes a claimant, if the 20-day
public works preliminary bond notice was not given as
prescribed by statute, to enforce a claim by giving written
notice to the surety and the bond principal, as provided,
within 15 days after recordation of a NOC, or if no NOC has
been recorded, within 75 days after completion of the work of
improvement.
4)Requires payments on contracts with progress payments to be
made as the awarding department prescribes; provides that
state and public agencies shall withhold at least 5% of the
contract price until final completion and acceptance of the
project; and that progress payments upon public contracts
shall not be made in excess of 95% of actual work completed,
except as follows:
a) At any time after 95% of the work has been completed on
a state project, the state may reduce the funds withheld to
an amount no less than 125% of the estimated value of the
work yet to be completed, as specified.
b) Allows a public entity to withhold 150% of the value of
any disputed amount of work from the final payment; or,
c) At any time after 50% of a local government project is
completed and the legislative body finds that satisfactory
progress is being made, it may reduce or eliminate
withholding.
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5)Provides that retention proceeds between an original
contractor and a subcontractor, or between two subcontractors,
not exceed the percentage specified in the contract between
the public entity and the original contractor, and requires an
original contractor to distribute retention proceeds to
subcontractors within seven days of receiving retention
proceeds from the public agency.
6)Requires a contractor in a public works contract to file a
performance bond with the public entity in specified amounts,
depending on the value of the contract.
7)Requires every original contractor who is awarded a contract
by a state entity involving expenditures greater than $5,000
for any public works project, to file a performance bond with
the state entity in a sum equal to or greater than the
contract's total payable amount.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author's office, "With
California's economy and cash flow continuing to tighten, it is
important for contractors to keep close controls on payments,
moneys owed, as well as potential disputes. The construction
industry is a vital part of California's economy, which has been
hurt by the economic recession. According to the United States
Bureau of Labor Statistics, as of April 2011, construction jobs
totaled just 569,500, down from a high of 945,100 jobs in
February 2006. At a time when the state's fiscal future is
uncertain and cash is tight, it is pertinent that we seek to
remedy this situation and find solutions to reinvigorate the
construction industry.
"To ensure that workers are promptly paid for work completed,
current law requires that payments be made based on the progress
of a project, within 10 days of when the owner or general
contractor is notified who is owed money. This bill would
further consolidate that schedule and would instead require that
progress payments be made within seven days.
"SB 293 would also allow subcontractors to access more capital
by lowering retention withholdings on public works to no more
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than 5%. A retention withholding represents a percentage of a
contract withheld so the owner or general contractor can
maintain a degree of control over the project. Lowering the
retention rate will place less of a financial burden on
subcontractors by ensuring that their labor and material fees
are justifiably covered.
"SB 293 further seeks to remedy payment issues in the
construction industry by changing the process for filing a late
payment notice. Third tier subcontractors, hired unbeknownst to
the general contractor, often file late payment claims resulting
in double payments for the general contractor. SB 293 would
require that all late payment claims be submitted before a
general contractor files a NOC. This ensures that they are not
hit with double payments."
Background . This bill relates to payments made to individuals
hired to perform work on public and private construction
projects, and the cash flow between public entities and
homeowners, general contractors, subcontractors, and suppliers.
This bill also revises the terms and conditions, as well as the
timeframe in which those payments must be made. Below are the
primary components of the measure relating to payments discussed
below: progress payments, claims to the surety and bond
principal for both private and public works, and retention.
Progress Payments . This bill reduces the time period a general
contractor has to pay his or her subcontractor after the general
contractor has been paid a progress payment from the owner.
This time period is reduced from 10 to 7 days. It is unclear
what percentage of payments occur in the last 3 days of this
window, and whether the reduction to 7 days will have any
significant impact.
Claims: Private Works . In private works of improvement, any
person who provides construction services or materials to a
construction project has the right to file a lien on the
property if they are not paid. A mechanic's lien is a "hold"
against a property that is recorded with the County Recorder's
office by the unpaid contractor, subcontractor or supplier. An
unpaid lien can cloud the title of the property and impose
barriers to borrowing against, refinancing, or selling the
property.
Before a contractor, subcontractor or supplier can file a lien,
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he or she must file a 20-day preliminary lien notice prior to
furnishing labor or materials and notifying the owner and
general contractor of the potential lien claim. Once a project
is completed and a NOC is filed with the County Recorder, a
contractor has 60 days to record a lien and a subcontractor or
materials supplier has 30 days.
Legally, the property owner is ultimately responsible for
payment, even if the homeowner has already paid the prime
contractor. The property owner can pay the claimant directly to
avoid having a lien placed on his or her property or to remove a
lien. This would result in a double payment of services, since
the homeowner has already paid the general or prime contractor
for all services. Or, the property owner can contest the lien
and obtain release of the real property from the claim of lien
by recording a lien release bond in an amount equal to 125% of
the disputed amount.
In addition, the property owner can file a complaint with CSLB
if a contractor is not paying his or her subcontractors or
suppliers for services and materials rendered, and CSLB can take
disciplinary action against the contractor for nonpayment.
Claims: Public Works . In public works projects, instead of a
lien claim, there are claims that can be made against the surety
and bond principal, referred to as a bond claim. Generally, a
subcontractor will file a 20-day preliminary bond notice to
inform the public entity that the subcontractor prior to
supplying labor, materials, or services. Subcontractors
routinely file this preliminary notice prior to the commencement
of work and receiving and payment for services as a protective
measure to inform the surety or public entity that work will be
performed for payment. If a subcontractor files this 20-day
preliminary notice and is not paid after 10 days of supplying
labor and materials, the subcontractor can file a stop notice
with the public entity to withhold the disputed amount from the
general contractor. The public entity will only release the
withheld amount to the general contractor once a stop notice
release is received from the claimant attesting that payment for
service has been rendered.
However, if a subcontractor does not file a 20-day preliminary
notice, provides labor and services, and is not paid, the
subcontractor is ineligible to file a stop notice with the
public entity. The subcontractor must wait until the project is
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completed or until a NOC is filed to submit a claim to the
surety for payment of services. This means, that even if a
project is not completed until a year after an unpaid
subcontractor provides labor or materials, but the subcontractor
did not file a 20-day preliminary notice, that subcontractor
will have to wait a year before receiving payment through a
surety. In this case, the subcontractor can make a claim within
15 days after recordation of a NOC, or if no NOC has been
recorded, up to 75 days after the NOC. This bill revises this
timeline to require the bond claim be filed before the final
NOC.
Many public entities require that contractors carry a payment
bond to ensure that contractors pay all debt related to a
construction project.
Retention . Retention proceeds represent a percentage of the
amount of a contract that is withheld from a progress payment by
the public entity to the original contractor, or the original
contractor to one of its subcontractors. By withholding a
percentage of a contract, the public entity or the original
contractor maintains a degree of financial control over a
project. In general, the public entity or the original
contractor withholds at least 5% of payment until the contract
is completed to the satisfaction of the public entity or
original contractor.
Current law allows for the retention of a percentage of a
contract price to guaranty a contractor's completion and
acceptance of a project. All California contractors working on
a public works project are required to possess performance bonds
that cover up to 150% of the cost of any disputed work.
Performance bonds can be one option a public entity uses to
guarantee from a third party that the project will get completed
if the contractor abandons or is terminated from the project.
If a contractor does not meet the contract obligations and the
public entity seeks to use the performance bonds, the bonding
company will seek selects the replacement contractor to complete
the remainder of the contract obligations at the lowest cost.
Support . According to the Associated General Contractors of
California and San Diego, "To ensure that cash flow is adequate
at a time when contractors' margins are shrinking and financing
is increasingly more difficult, establishing an appropriate
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retention ceiling is very important. The public is protected
from default by bonding requirements.
"Under current law, subcontractors are required to file a 20-day
pre-lien notice to ensure that the owners and general
contractors are informed of who has lien claim rights. However,
there is an unfair provision in the current law that allows a
subcontractor to file a claim against the bond up to 75 days
from the NOC. In large public works contracts, there can be a
multitude of subcontractors and material suppliers. The general
contractor does not know all of the material suppliers and
second and lower subcontractors on the job that have the legal
authority to file a claim.
"Current law places the general contractor in a situation of
paying out all payments to its principal subcontractors only to
find out after all the proceeds have been paid, that an unknown
subcontractor or material supplier was not paid. If the
subcontractor who should have paid their subcontractor is
judgment proof, it means the general contractor will have to pay
twice for the same services or materials."
According to the Engineering & Utility Contractors Association
and several trade organizations, "SB 293 would require that
progress payments be made within seven days instead of the
current 10 day requirement. In addition, this bill also allows
subcontractors to access more capital by lowering retention
withholdings on public works to no more than 5% as opposed to
the current 10% limit. A retention withholding represents a
percentage of a contract withheld so the owner or general
contractor can maintain a degree of control over the project.
Lowering the retention rate will place less of a financial
burden on subcontractors by ensuring that their labor and
material fees are justifiably covered."
According to the Air Conditioning Sheet Metal Association, "This
bill modifies the timeline for which a surety bond claim can be
filed on public works projects and revises the timeline by which
prime contractors must pay their subcontractors once they have
received payment from an owner on a construction project. In
addition, this bill provides a cap on the amount of retention
that may be held against contractors on public works projects.
"While California's economy and cash flow continue to tighten,
it is important for contractors to keep close controls on
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payments, money owed, as well as potential disputes. This
measure will resolve payment-related issues and help struggling
contractors with cash flow problems. The solution is a balanced
approach that will expedite progress payments and ensure that
anyone who provides material and labor to a public works project
gets paid for work performed and approved when they provide
notice of that work prior to the job being completed."
Opposition . According to California's Coalition for Adequate
School Housing, "School districts, in good faith, negotiate
contract provisions and typical retention amounts are negotiated
at approximately 10% of the contract value. If a contractor and
a public agency wish to limit retention proceeds to 5% - as the
bill seeks to achieve - current law allows for it.
Retention is necessary for public agencies to ensure 1) prompt
completion of a project; 2) that contractors return to a project
to complete all contract requirements, including small
unprofitable punch list items; 3) there are sufficient funds for
public agencies to correct defective work if a contractor fails
to do so; 4) to have sufficient funds to honor stop notice
claims filed by subcontractors and suppliers; and, 5) to have
sufficient funds withheld in order to pay workers in the event
contractors have failed to properly pay prevailing wage as
determined by DIR. By prohibiting contract withholdings from
exceeding 5%, and removing the flexibility to negotiate a good
faith provision between a public agency and a contractor, SB 293
significantly thwarts an agency's ability to ensure that the
provisions of their public works contracts are fully executed.
"Finally, contractors are currently provided the protection
intended by SB 293. Existing statute requires public agencies
to make timely payments of both progress payments and final
payments unless there is a legitimate dispute over work.
Additionally, contractors may opt to place all retention in a
contractor-established escrow account and to receive the
interest from that account."
According to a coalition of public agencies, "Local agencies
must accept the lowest responsible bidder when awarding
contracts. A 5% retention cap imposes a one-size-fits-all
policy and removes flexibility to appropriately manage risk on a
project-by-project basis? Ambiguity of the term 'substantially
complex' will lead to increased litigation and bid process
challenges. Prohibiting retentions over 5% until 2016 would
implement a bad policy at the worst possible time. During this
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difficult economic and budgetary time, public agencies,
taxpayers and ratepayers cannot afford failures on the part of
general contractors."
According to the American Subcontractors Association California,
Inc., this bill "repeals all second tier subcontractors'
longstanding statutory right to get paid in the event they did
not file paperwork before the project is complete or before a
NOC is recorded? Repealing �this provision] is just wrong,
especially as the obvious consequence of this provision would
allow general contractors to reap a windfall because they could
entirely avoid paying for labor and materials that were supplied
to the job. Perhaps the general contractors and the surety
companies simply need to communicate in a way that prevents the
alleged problem of general contractors not knowing who is on
their job sites and to whom they owe money. If they did know,
these alleged double payments would not occur; indeed, we have
seen no documentation of these double payments that allegedly
occur."
Related Legislation . AB 1354 (Huber) prohibits a public entity
from retaining more than 5% of a contract price until final
completion and acceptance of a project. This bill is pending in
the Assembly Business, Professions and Consumer Protection
Committee.
Previous Legislation . AB 2216 (Fuentes) of 2010, would have
reduced the time available to a claimant to give written notice
that he or she is enforcing a claim against a bond for a public
works project, and decreases the time period during which a
contractor must pay his or her subcontractors. This bill was
held on the Senate Floor.
AB 396 (Fuentes) of 2009, would have reduced the time available
for a claimant to make a claim against a bond by providing that
if a claimant has not provided a 20-day public work preliminary
bond notice as specified, the claimant may enforce a claim by
giving written notice to the surety and bond principal prior to
the completion of the project or recordation of a NOC. This
bill was held in the Assembly Appropriations Committee.
SB 629 (Liu) of 2009, would have prohibited retention proceeds
withheld from any payment made by an owner to the original
contract from exceeding 5% of the amount otherwise due under the
contract, applicable to all contracts entered into on or after
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January 1, 2010. This bill was held on the Assembly Floor.
SB 802 (Leno) of 2009, would have prohibited a public entity
from retaining more than 5% of a contract price until final
completion and acceptance of a project. The Governor vetoed
this bill with the following message:
"When a contractor fails to complete a public works project, the
public entity needs recourse to ensure that the project gets
completed. Public works contracts have a higher level of risk
as public entities usually have to accept the low bidder.
Though there are options available to the State to go after a
contractor who fails to complete the terms of a public works
contract, retaining portions of payment to the contractor
provides incentive for the contractor to complete the project.
While I am sympathetic with the concerns of subcontractors, the
State's responsibility is to protect the taxpayer to make
certain that public works projects are completed correctly and
within budget; limiting the retention amount hampers the State's
ability to do that."
SB 593 (Margett), Chapter 341, Statutes of 2008, prohibits the
Department of Transportation from withholding retention proceeds
to its contractors when making progress payments for work
performed on a public works project.
SB 619 (Migden) of 2007, would have prohibited state and local
government agencies from withholding from an original
contractor, or an original contractor from a subcontractor, more
than 5% of a payment on public works contract. This bill was
held on the Assembly Floor.
AB 806 (Keeley) of 1999, would have limited retention proceeds
on public works contracts to 5%, and prohibits the state,
including all state agencies and political subdivisions of the
state, contractors, and subcontractors from withholding more
than 5% of a scheduled payment on a public works contract. AB
806 was vetoed.
AB 2084 (Miller), Chapter 857, Statutes of 1998, provides that
the percentage of retention proceeds withheld by a contractor
from a subcontractor may not exceed the overall retention
percentage specified in the public works contract between the
contractor and the public agency builder.
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AB 940 (Miller) of 1997, would have, among other things, limited
retention payments by public entities on public works to 5%.
This bill was vetoed with the following veto message:
"Regrettably, once again, I find a bill before me that
establishes a double-standard for the treatment of the retention
levels charged by public agencies. The private sector is free
to establish its own level for retention in an open marketplace,
where building owners, contractors and subcontractors freely
enter into construction contracts, which often include a 10%
retention level. Here before me is a bill which would
arbitrarily restrict public agencies to retention rates of half
the private sector standard.
"As I expressed in my veto message of AB 1949 (Conroy) last
year, 'Government agencies must be able to protect public
construction projects from unnecessary risk in a fashion similar
to the private sector.' I have not deviated from that stance.
As a public manager, I believe it is reasonable to ask public
agencies to manage public works projects according to the same
standards, criteria and level of professionalism as is practiced
in the private sector. It would be irresponsible of me,
however, to tie the hands of public agencies with statutory
restrictions and expect a similar performance standard.
AB 1949 (Conroy) of 1996, would have, among other things,
limited retention payments by public entities on public works to
5%. AB 1949 was vetoed.
Double-referred . This bill is double-referred to the Assembly
Judiciary Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
California State Council of Laborers (sponsor)
Air Conditioning Sheet Metal Association
Air-Conditioning & Refrigeration Contractors Association
Associated General Contractors of California
Associated General Contractors of San Diego
Building Industry Credit Association
California Association of Sheet Metal and Air Conditioning
Contractors' National Association
California Landscape & Irrigation Council
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California Legislative Conference of the Plumbing, Heating and
Piping Industry
California State Pipe Trades Council
Concrete Contractors Association, Inc.
Engineering & Utility Contractors Association
Golden State Builders Exchanges
International Brotherhood of Electrical Workers
National Electrical Contractors Association, California Chapters
Western States Council of Sheet Metal Workers
Opposition
American Subcontractors Association California, Inc.
Associated Roofing Contractors of the Bay Area Counties, Inc.
Association of California Healthcare Districts
Association of California School Administrators
California Association of Sanitation Agencies
California State Association of Counties
California Association of School Business Officials
California School Boards Association
California Special Districts Association
California's Coalition for Adequate School Housing
Cupertino Union School District
Darden Architects, Inc.
Desert Water Agency
East Valley Water District
Eberhard Roofing
Kern Community College District
League of California Cities
Los Rios Community College District
Mt. San Jacinto Community College District
Peralta Community College District
PLUM Architects
San Diego Community College District
Sanitation Districts of Los Angeles County
Three Valleys Municipal Water District
Union Roofing Contractors Association
Urban Counties Caucus
West Kern Community College District
Analysis Prepared by : Joanna Gin / B.,P. & C.P. / (916)
319-3301
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